Housing demand calculation methodology

[Chris W]

FYI,

How the Auckland council estimates for demand for Auckland residential real estate.

Note that the Auckland council does these estimates for urban planning purposes for the longer term needs of the population - infrastructure (such as roads, schools, retail space, parks, electricity, sewerage pipes, sewerage processing capacity, reservoir capacity for water, waste processing, etc) and services (such as sewerage, water needs, rubbish collection, etc). These projects require long term planning.

http://www.stats.govt.nz/browse_for_stats/population/estimates_and_projections/auck-pop-alt-migration-2017.aspx

"Auckland had an average of about 2.9 people per household (private dwelling) in 2001, 2006, and 2013. Applying this simple ratio to the population projections indicates how many more dwellings need to be built to accommodate the population."


Adjusting from fundamental long term demand for housing to market driven demand for housing ...

Whilst I can understand that using a static figure of 2.9 people per household is helpful in long term planning of infrastructure, it is less helpful (even misleading) in calculating market driven demand for housing with changing price levels. Market demand changes with price levels.

To estimate the market demand for housing one might need to adjust the number of people per household for different price levels of rent and house prices. This one keyassumption used to determine housing demand to which the calculation isextremely sensitive - the average household size of 2.9. Given thathousing affordability has significantly decreased since 2001, this numbershould change based on current rent levels and property price levels. As pricelevels increase, the average household size could increase due to lack ofaffordability (of rents or property prices) as young adults delay leaving home,flatmates get more people in the house to afford the rent, grandparents movingin with their adult children and grandchildren, young couples live with their parents, etc. For example there are manyinstances of garages converted into rental accommodation, or additional roomsadded to existing dwellings which would impact overall household sizes. If you change this variable even slightly for current rental and property price levels, then you might get even get market driven housing demand being less than supply in Auckland.

Market driven demand for housing includes property investors, property traders, and property speculators, whilst fundamental long term housing demand does not.

Note that this is different issue altogether from affordable housing.

[Bob Kane]

Was there a point to your post?

[kiwidag]

Not sure... maybe aiming to fine tune methodology of calculating housing demand???

[Chris W]

To use housing demand estimates by the Auckland Council (which is then used for their infrastructure planning, etc) is not that useful in calculating market demand for property, and the resultant impact on property prices. Housing estimates by the Auckland Council will continue to increase due to population growth, yet property prices will not necessarily continue to increase indefinitely in a straight line upwards.

In the current situation in Auckland, there is increasing population growth, yet market demand for property in Auckland has fallen (as evidenced by the fall in number of completed transactions), which has resulted in property prices in Auckland being 5-9% lower than the peak prices.

Take this case in Sydney, where there is population growth and inbound migration, yet there is a 30% drop in asking prices by vendors in the suburb of Darlinghurst, and other smaller drops in asking prices in other suburbs in Sydney.

http://www.news.com.au/finance/real-estate/sydney-nsw/home-sellers-drop-listed-prices-by-up-to-30-per-cent-in-pockets-of-sydney/news-story/dae2aaaad1596760ffaa06d5f0975337

There are a number of other variables which have a more significant impact on market demand for property.

[Davo36]

Maybe things got ahead of the game somewhat? In that house prices got well above the fundamentals? And are now coming back a bit.

[Don't believe the Hype]

Councils are required to complete a tick the box exercise for central govt out show that they have enough land ready for development to meet future demand - ten yrs I think.

This then sets their targets for opening up land and installing infrastructure. By the nature of how it's measured and reported councils have a vested interest in keeping the demand number low so they can deliver their target at the lowest possible cost.

There is no incentive for councils to exceed demand estimates or even increase demand estimates. All it does is impose greater cost on council by increasing the requirement for infrastructure.

[Chris W]

Thought that it was worthwhile sharing this comment by WINZ on another thread here,

The common thinking was that population growth and migration was believed to drive property demand and hence property prices higher. That turned out to be incorrect.

https://www.propertytalk.com/forum/showthread.php?17894-Financial-Armageddon!!&p=427431&highlight=#post427431

[Chris W]

Many property market participants and property market commentators are using underlying housing demand to develop their expectation of future property prices, when in fact they should be using effective housing demand. You can also apply this approach to the supply side in the housing market - underlying housing supply and effective housing supply

A 2009 / 2010 report by the Dept of Building and Housing recognises two types of demand
1) underlying housing demand
2) effective housing demand

1) Underlying housing demand

‘Underlying demand’ refers to the number of houses needed to accommodate households in the population. Population increase in the age range of 20–40 (which is when people tend to form independent households) leads to smaller household sizes and more single-person households. Further, positive net migration increases underlying demand for housing. A ‘household’ means either one person who usually lives alone, or two or more people who usually live together and share facilities in a private dwelling.

Natural population growth rates, internal migration, housing preferences and household formation rates all tend to change relatively slowly, and therefore changes in underlying demand caused by these factors are reasonably predictable. By contrast, the level of external migration depends on policy rules and incentives, as well as on wider domestic and international economic conditions, and it therefore tends to have a more volatile, less predictable impact on underlying housing demand

2) Effective housing demand

Effective housing demand is the combined effect of both 1) the desire to rent or buy a house, and 2) the financial ability to rent or buy a house. This aspect of demand is what shows up in the housing market statistics for sales, prices and construction. It also largely accounts for the changes in housing and tenure choices over time.

The New Zealand housing market has not only experienced increased underlying demand from population growth and higher net immigration; it has also (until the recent global financial crisis) experienced an increase in effective demand as a result of higher incomes, lower unemployment, cheaper and easier access to credit, and the preference of New Zealanders, for various reasons, to invest in housing over other forms of investment.

The difference between underlying and effective demand is a function of:
• buyer wealth and income
• the cost and availability of finance
• the state of the economy
• individual consumer preferences (for example, location, or between renting and owning)
• the attractiveness of housing as an investment good.

Source: http://www.mbie.govt.nz/publications...ing-report.pdf

[Chris W]

Thought it was worthwhile sharing the link on this thread topic.

Interesting case study, debunking the commonly held belief by many property market commentators, and property market participants that population growth leads to increasing demand for property and results in an uninterrupted rise in property prices. In the case below, underlying demand was expected to continue, however effective demand fell very quickly.

When you have rapid population growth, then get property prices falling by more than 50% ...

https://www.propertytalk.com/forum/showthread.php?42673-Has-anyone-witnessed-firsthand-a-property-price-bubble-What-does-it-look-like&p=431412#post431412

[Bob Kane]

The common thinking was that population growth and migration was believed to drive property demand and hence property prices higher. That turned out to be incorrect.

Between 2002 and 2008 house prices in NZ doubled.
The South Island population stayed the same but South Island house prices doubled.
Interesting, isn't it?
Something drove SI house prices up but it wasn't the increase in population.

[Chris W]

Between 2002 and 2008 house prices in NZ doubled.
The South Island population stayed the same but South Island house prices doubled.
Interesting, isn't it?
Something drove SI house prices up but it wasn't the increase in population.

Bob,

Thank you for sharing your story about the South Island. Very interesting. Certainly some other key factor driving the house prices.

[Bob Kane]

A rising tide lifts all boats.

[eri]

i would imagine the rising cost of new housing

also lifted the price of old housing

esp. old housing in prime positions

[Don't believe the Hype]

If demand and supply at a macro level is balanced. I.e 100 new families needing homes perfectly matched to 100 new homes being built, how do we account for the fact that these houses are being built on the outskirts of the city while these 100 families want to live on the city fringe.

[Anthonyacat]

A rising tide lifts all boats.